UPDATE 1-Southern Copper wins tender for Peru's Michiquillay mine

LIMA, Feb 20 (Reuters) - Southern Copper Corp won a tender to develop Peru’s estimated $2 billion Michiquillay copper mine in an auction that attracted just two bidders, the government’s Proinversion investment agency said on Tuesday.

Southern, controlled by Grupo Mexico SAB de CV , won with a proposal to transfer $400 million to the government and pay 3 percent royalties, beating out Compania Minera Milpo, which had offered $250 million in transfers and 1.875 percent royalties.

Peru is the world’s second biggest copper producer after Chile. The auction - Peru’s first in at least a decade - was delayed twice last year, in part due to political turmoil that has buffeted President Pedro Pablo Kuczynski.

The auction served as a test of investor confidence in Kuczynski, a former Wall Street banker who was nearly impeached in December.

Ten companies had presented pre-registration documents. The eight companies that registered but did not present bids included the local affiliates of Rio Tinto PLC and Teck Resources Ltd, and Peru’s Compania de Minas Buenaventura SAA.

Anglo American Plc returned its contract for operating Michiquillay to Peru in late 2014 due to capital constraints. The company had estimated it would produce some 200,000 tonnes of copper per year.

Peru’s government says the project holds an estimated 1.159 billion tonnes in copper resources and will need investment of around $2 billion to develop.

Southern and Buenaventura said last year they were interested in bidding on the contract. Southern’s chief executive told Reuters in September that Michiquillay has arsenic impurities, requiring a “slightly higher” investment to clean up the area.

Peru has seen private investment fall as companies steer away from infrastructure projects due to corruption investigations. The country plans to tender some 15 projects that would cost up to $10.35 billion in 2018, according to Proinversion.

Analysts say Michiquillay could add 0.5 percentage point to Peru’s annual economic growth in coming years. But developers of the mine will need to appease nearby villagers in the Cajamarca region, which is prone to conflicts over natural resources.

“It is an interesting deposit with great development possibilities and good technical conditions, but it will be important to have agreements with communities,” Carlos Gálvez, the director of the National Society of Mining, Petroleum and Energy, told Reuters.

The government has assured villagers near Michiquillay that the project would not affect their water supplies. (Reporting by Teresa Cespedes; Writing by Caroline Stauffer and Luc Cohen; Editing by Leslie Adler and Rosalba O’Brien)